Buy Emerging Market Tech Stocks for Cyclical Exposure, UBS Says

By Ben Levisohn

Emerging market investors are in a bind. Don’t believe me? Take it from UBS strategist Nicholas Smithie.

Bloomberg

In a report released today, Smithie uses just those words to describe the uncomfortable spot EM equity investors find themselves in right now–stuck between a global risk rally, on the one hand, and slowing emerging-market equity growth, on the other.

Meanwhile our Economists are revising down their economic growth forecasts across the Emerging Markets and the UBS Growth Surprise Index for the emerging economies continues to surprise to the downside.

Of course, being a strategist he has an opinion, one that attempts to split the difference between expensive defensives and cheap cyclicals by finding cyclical stocks with solid fundamentals and defensives at cheaper valuations. Such stocks are hard to find these days, but found them, he has. Smithie’s recommendation: Buy emerging market tech stocks.

Why tech? Smithie notes that emerging-market tech stocks have a lower beta–or volatility relative to the market–both when stocks are going up and going down. the tech sector is also “the rare part of the Emerging Markets universe that exhibits positive earnings momentum,” Smithie says. In fact, it was the only one that beat forecasts every quarter during 2012. Emerging-market tech stocks also have plenty of cash, which could be used to boost dividend payments. The best part: Many of these stocks are still cheap, especially within the semiconductor industry.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.